D.he major European banks will again be able to distribute dividends to their shareholders next year. The European Central Bank (ECB) eased the dividend freeze imposed on banks in the euro zone during the Corona crisis. However, clear limits still apply: on Tuesday evening, the ECB advised the banks that they should either pay no dividends or only to a limited extent or buy back shares by the end of September 2021. There should be no more distributions or buybacks
than 15 percent of the combined profits for 2019 and 2020. They should also not exceed 0.2 percentage points of the respective Common Equity Tier 1 ratio.
For Deutsche Bank, for example, these requirements mean that it is initially not allowed to pay any dividends, as it posted a high billion-dollar loss in 2019. The ECB also repeated its call for “extreme moderation” with regard to the bonus payments to employees. The 113 banks under the supervision of the ECB are affected by the regulation.
Prefer to use profits for loans
“The revised recommendation is intended to ensure banks’ ability to absorb losses and support lending to the economy,” the supervisors wrote. At the beginning of the Corona crisis in March, the central bank asked the banks to refrain from paying dividends until October; it then extended the deadline to January 2021. This was to ensure that the banks can continue to provide the economy with loans with their available capital and profits and to cushion any losses. Many banks had run a storm against these restrictions: Without dividend payments, they would no longer be attractive to international investors, so their main argument.
Criticism of the loosening comes from Sven Giegold, the financial policy spokesman for the Greens in the European Parliament: “The lifting of restrictions on dividend distributions and share buybacks could not come at a worse time,” he says. “Lately the ECB has been warning relentlessly that the worst for banks in this pandemic is yet to come.”
Loan Default Warning
The German financial regulator Bafin, however, welcomed the decision of the ECB. “To advise the institutes to continue to deal very restrictively with distributions is the right way,” said Bafin President Felix Hufeld. He has already warned several times that the pandemic could shoot up loan defaults, which would lead to losses. Institutions should therefore hold as much capital as possible. This also applies to the smaller German banks.